It’s worth persevering with Renergen

The timeline may have been lengthened and the share diluted, but the company could well be a worldclass enterprise in the making

This column will, I’m sure, draw heated debate about a share that was at one time a market darling but has over the past months rapidly and unjustifiably turned into a conspiracy theorist’s dream and a market pariah.

The stock in question is alternative energy and helium counter Renergen. Some readers will recall my recommendation of the company as far back as the start of 2021 at R12, and at its peak, at the end of March 2022, at R43.90. As I write this column, the stock is trading at R20.50, down 17.3% in the year to date and 47.6% over 12 months.

Many shareholders who went in at higher levels are naturally unhappy, some complaining vociferously. Check Twitter at any time and you will see the level of angst.

I’m not here to defend either my recommendation or the company. As an independent analyst I was fully aware of the risks in recommending and covering what was a new endeavour in the domestic alternative energy landscape. Many small retail and institutional investors were perhaps not as tolerant as I am, and thought this unique energy project would hum along tickety-boo with no issues. We were all wrong. It was at times challenging — as many pioneering projects are, anywhere, globally.

Having visited the company’s site five times over two years, I continue to have faith in the project and believe in its ultimate profitability. Building from scratch and proving a greenfield liquefied natural gas (LNG) and helium deposit in the Free State was never going to be an easy task, nor was it going to follow a scheduled timeline. However, Virginia Phase 1 (VP1) is now fully operational and is a deposit that independent global experts have deemed truly world class.

VP1 has cost about R1bn. It was only modestly over budget; not bad, considering that it was being built during the pandemic and the subsequent supply chain disruption — the plant was constructed in China, then disassembled and later reassembled in the Free State. This resulted in commissioning being delayed by almost a year. It was the root cause of much of the market’s displeasure over Renergen.

I recently went to see the final commissioned VP1 production site, together with five institutional investors, who collectively manage nearly R250bn. Some were seeing the site for the first time and remarked on the extreme complexity of what is a pilot plant for the much larger Virginia Phase 2 (VP2).

Phase 1 will produce about 50t of LNG a day and up to 275kg of helium when fully optimised by October. Phase 2, on completion by 2027, should produce up to 800t of LNG a day and 4,500kg of helium. This is the big story; but there are hurdles ahead.

Renergen has not been without problems. Many have been self-inflicted, as promised timelines for the production of LNG and especially helium were lengthened by technical issues. In hindsight, the provision of timelines has come back to bite the company. I am sure it will be more cautious and reserved with its communication to the wider market about VP2.

Corporate credibility has also been diminished as promised events failed to live up to expectations and the generated hype. A R1bn investment by the Central Energy Fund (CEF) for a 10% stake in Renergen’s operating

Tetra 4 division, announced in March 2022, has yet to materialise. Management remains optimistic; the market remains unconvinced.

In some quarters the market is also seething at the ongoing equity placements; 10% of Renergen has over the past 12 months been raised from R36 to the recent R24 to fund working capital. This has led to ongoing dilution and a never-ending sea of paper, with a weakening share price having to absorb ever lower placement prices.

The last issuance at R24 was, however, keenly priced and oversubscribed, with new institutions getting on board. This was a positive signal. Management argues that if it had raised all the requisite funding at the start of the VP1 project it would have placed shares at 800c. Staggering the issuances to when funds were needed has led to an average of R25 gained, and curtailed very hefty dilution. Cold comfort to those who bought in at higher levels, but a reality.

A very recent sell-off of the stock related to the release in early March of the teaser circular for the Nasdaq listing. The IPO and listing are now scheduled for the third quarter of 2023, depending on market conditions. This is not a rights issue, rather a direct placement of up to 67.5-million shares to raise $150m. On the site visit, one institution extrapolated this price to the rand equivalent of R41.30, or double the then ruling share price.

There was, naturally, incredulity at the stated IPO price range of about $2.22 a share. What was this financial wizardry? However, a review of similar alternative US

energy projects that listed, or have undertaken capital raises, provides grounds for giving a higher valuation to Renergen’s assets than what it is now.

Former JSE- and now Nasdaq-listed Montauk, as well as US-domiciled Clean Energy Fuels Corp and North American Helium, already have juicy valuations of earnings before interest, tax, depreciation and amortisation (ebitda). Renergen, on listing, should it attain its IPO valuation, will be at a significantly lower ebitda rating than its peers.

Local investors may become rather excited as the US book build starts to gather momentum midyear. It’s not every day that US investors get to buy into a new indemand commodity at a fat discount to comparable peer counters. Locals may see the IPO pricing as rich; the US market may see it differently. So does that suggest the JSE and Australian Securities Exchange valuations are unreasonably low? Only time will tell.

My crystal ball cannot foretell the future; I just extrapolate the information as I see it. However, I do maintain my course on Renergen and my belief in the stock and its prospects as stated in my original January 2021 stock recommendation.

VP2 will be a giant project; it’s 12 times larger than VP1. The recent update of the capital cost of VP2 puts it at $1.16bn, or R20bn. It caused the market to wince, but this increase is a function of the weakening rand rather than engineering issues.

The lengthening by a year of the VP2 timeline to production into 2027 has further strained market belief in the stock, and the credibility of the counter in some quarters has been badly tarnished. What raised a market eyebrow was the ebitda range for Renergen in its first full year of LNG and helium production to endMarch 2028. That range, in a public document that will be the basis for a legal filing for the Nasdaq, was R5.7bnR6.2bn. These assumptions were based on conservative prices for LNG and helium of R250 per gigajoule for LNG and $600 per thousand cubic feet for helium. Both projections are well below current prices. Yes, this ebitda is counterweighted with $750m of debt provisioning, but at highly favourable rates and servicing cost of about R1bn a year. That, again, led to a sharp intake of breath when the circular was released. More information will be forthcoming in the Securities & Exchange Commission filing.

However, given a light annual operating cost of R1bn, debt costs will be handsomely covered, leaving about R4bn of ebitda for shareholders.

Renergen’s current market valuation is R3bn. The fact that this ebitda number is now in the public domain and authorised by Renergen and its US advisers leads to the semblance of a line in the sand being drawn. It’ sa confident company that publishes such a number for a US listing unless it believes they are indeed achievable.

The market has been suffering much Renergen post-traumatic stress. The next few months will be crucial for the company. With a great deal of mud being thrown at the counter over the past months, and the resultant share price slide, management now needs to get key corporate deliverable boxes ticked. These will be vital for the rebuilding of confidence and, more importantly, for corporate credibility.

The boxes to be checked, in my order of significance, are: (1) The US International Development Finance Corp, granting $500m in debt funding; (2) A global bank following suit with a guaranteed $250m debt facility; (3) The gaining of an underwriter of record for the Nasdaq listing; (4) A successful book build, hopefully at or near the stated US dollar price range, and oversubscribed; (5) A positive US market listing; (6) The CEF getting on board; and (7) The announcement of the tenders and engineering, procurement and construction contracts for the VP2 project. That’s a heck of a lot to achieve, but to my mind it needs to be undertaken to rebuild investor confidence.

Much depends on US market conditions. A regional bank crisis in the US hardly helps, but the regulators have quickly stepped in to restore market confidence. Energy, however, remains in global — and especially South African — demand. With South Africa in an energy crisis there is no doubt that a reliable source of ESG-credible energy like LNG will be a sought-after commodity.

On the institutional site visit comments were made that major corporates were clamouring for energy solutions for power as well as transportation. The opportunity for VP2 LNG is significant. Similarly, the surge in demand for helium globally from vast capex within the US semiconductor manufacturing, space delivery and technology sector should result in offtake of Renergen’s superior helium deposit.

Much has already been contractually secured by global household names within the sector. The market forgets that a large percentage of LNG and helium has been pre-contracted, derisking the project. Because the price of helium is dollar based, the rand’s recent slide will add to Renergen’s rand hedge qualities, as more than 50% of ebitda is allied to the gas.

I wrote, back in the day, that Renergen was not a widows-and-orphans stock. It was a stock moving from exploitation to commerciality. That came at a risk and a cost. There have been hiccups along the way, but a successful and operating project is working in the Free State. The concept has been proved. Now VP2 needs to get under way to counter the doubting Thomases.

The coming months may be volatile for Renergen shareholders. There are many fast-moving parts, but achieving just a few of my stated points will immeasurably improve investor confidence as well as the share price.

I don’t have all the answers; I am not a cheerleader for Renergen, despite what some on Twitter may think. But I believe, as many do, in the valuable compounds located in the Free State, and that if these are properly exploited, extracted and sold, it just could make Renergen shareholders in the long run a great deal of money.

The English novelist PG Wodehouse wrote in 1924: “If you don’t speculate, you can’t accumulate.” Despite the slings and arrows Renergen has faced over the past months, this rings true.

I am holding the line on the stock.

Having visited the company’s site five times over two years, I continue to have faith in the project and believe in its ultimate profitability